The Real Suicide Bombers? Western Democracies

It was a brief article -- six paragraphs buried on C10 of the February 3 Wall Street Journal. The headline: “More Investors Position for Possible U.S. Default." It began:

The net amount of derivatives used to hedge or speculate against a default on U.S. government debt rose 12% in late January, according to Depository Trust and Clearing Corp. figures. The increase suggests investors are becoming more nervous about the quality of U.S. debt.

As is well known by now, whenever a murderous blast goes off somewhere in the world there’s a good chance that the perpetrator’s name will be Mohammed or some variation thereof. But lethal as these misguided human missiles may be -- especially when they act in concert, as happened on 9/11 -- the damage they inflict isn’t decisive. Societies may steel themselves, as Israel did in the wake of a string of bus bombings and other atrocities, to take effective measures to bring them under control.

If and when the West vaporizes itself in a thermonuclear explosion of debt, however, the effect will be truly cataclysmic.

A friend of mine, a Times-worshiping “progressive” who nonetheless is a staunch supporter of Israel, said recently that he was afraid changes in Egypt could tip the world into chaos. I agreed, but added that, as bad as the Egyptian situation may turn out, it could still be among the least of our problems. My friend scoffed. What could be worse than the pivotal Arab country becoming a terror state? That certainly would be bad. But it would be worse if there’s no one able to fight back.

That’s the powerless position the West could find itself in after decades of policies designed to keep pols in their jobs, “progressives” in the redistributive catbird seat, and the populace lulled into a false sense of social “security.” Those in the know say Greece and Ireland can’t possibly pay back the debt they’ve incurred, but that may be just the tip of the iceberg. What if Greece, Ireland, Portugal, Spain, Italy -- and California, Illinois, and Rhode Island -- all went belly up at more or less the same time? (Technically, a state can’t default. But, technically, Greece didn’t default last year either.)

It may seem farfetched that they’d all go at once. But in the fall of ’08 we saw a fast-moving financial chain reaction that almost instantly shook Wall Street and the global financial system to its core. AIG and others might have failed the same week as Lehman Brothers if the government hadn’t stepped in. Is it really so hard to believe that the European debt dominoes might start to fall at about the same time as their American counterparts? And isn’t it possible, if not likely, that a big European default could set in motion a big U.S. default (or vice-versa)?

One thing we know for sure is that markets are interconnected. An investor who sees an American state tottering (e.g., unable to issue new debt), and who believes that others are close to the same condition, might well decide that he requires a much higher indemnity (coupon) to take Euro debt off issuers’ hands. And, as we saw with Greece, an issuer can suddenly run out of options -- having to sell bonds to fund current operations or roll over old debt, yet being unable to pay the higher interest necessary to float them. It’s the ultimate rock-and-a-hard-place scenario, and our esteemed Uncle Sam himself, pushed by our Ponzi president, is rushing in.